Obligations Reviewer for CPA Aspirants

OBLIGATIONS Prepared by: Raymond Andes Sources: The New Civil Code of the Philippines; commentaries by Paras and Tolentino; reviewer prepared by Soriano; Bar-Ops reviewer prepared by students of UP Law; and some personal inferences Definition according to the Civil Code of the Philippines: obligation is a juridical necessity to give, to do, or not do (Art. 1156). Juridical Necessity means that the court can be asked to order the obligor to perform the obligation. As many noticed, this definition stresses merely the duty of the debtor (passive element) without emphasizing the corresponding right on the part of the creditor (the active element). Justice JBL Reyes then quotes the following definition given by Arias Ramos: “An obligation is a juridical relation whereby a person (the creditor) may demand from another (the debtor) the observance of a determinative conduct (the giving, the doing or not doing), and in case of breach, may demand satisfaction from the assets of the latter.” Furthermore, these definitions refer to civil obligation since a natural obligation cannot be enforced by court action. The former is based on positive law while the latter is based on natural law and exists in equity and moral justice. Moral obligations cannot be enforced by courts as well as these are based on the laws of the church, and not positive law. Requisites of Obligation 1. Active Subject = creditor/obligee = one who has the right to demand performance of the obligation 2. Passive Subject = debtor/obligor = one who is obliged to perform the obligation. 3. Prestation = the subject matter of the obligation. Prestations in… Real Obligation = the thing, whether determinate or generic Personal Obligation = the services or acts 4. Efficient Cause = the vinculum or the legal or juridical tie that binds the parties to an obligation. It may consist of any of the five sources of obligation. Sources of Obligation 1. Law. However, only those expressly determined in the Civil Code or in special laws are demandable, and shall be regulated by the precepts of the law which establishes them; and as to what has not been foreseen, by the provisions on Obligations. We cannot presume existence of an obligation if no express provision is stated in our laws. 2. Contract – a meeting of minds between two persons/parties whereby one binds himself, with respect to the other, to give something or to render some service. 3. Quasi-contracts – Certain lawful, voluntary and unilateral acts done by a person giving rise to a juridical relation to the end that no one shall be unjustly enriched

by another (Art. 2142). Examples: Negotiorum Gestio and Solutio Indebiti Negotiorum Gestio – voluntary administration of the property, business, or affairs of another without the latter’s consent or authority. Solutio Indebiti – payment by mistake. This creates an obligation to return the payment. Big Distinction between Contracts and Quasi-Contracts – some of you may think that a Quasi-Contract is an implied contract. However, it is not. For in contracts, whether implied or expressed, the meeting of minds has always occurred. In quasi-contracts, on one hand, there was never a meeting of minds. 4. Delicts (a.k.a. crimes or felonies) – acts or omissions punishable by Law. According to the Revised Penal Code, the commission of a crime makes the offender also civilly liable. 5. Quasi-delicts (a.k.a. “tort” or “culpa aquiliana”) = acts or omissions that cause damage to another, there being no contractual relation between the parties (Art. 2176). Distinctions between Delicts and Quasi-Delicts DELICTS Does not necessarily cause damage… …As long as the act is punishable by law, then the act is a delict/crime. May not necessarily be based on fault or negligence.

QUASI-DELICTS All kinds of quasi-delict cause damage... …but none is punishable by law Based on fault or negligence.

Note: The enumeration listed above is based on Art. 1157 of the Civil Code of the Philippines. However, many critics believe that the list is not scientific. They say that there are only two sources of obligations: law and contracts because obligations arising from delicts, quasi-delicts and quasi-contracts are provided for by law. Distinctions between Contracts and other sources of Obligation CONTRACTS Obligation is provided by the contract itself. Requires the concurrence of both parties. Based on what was agreed upon by the parties.

OTHER SOURCES Obligation is provided by law. Does not require the concurrence of both parties. Based on what was provided by laws.

NATURE AND EFFECT OF OBLIGATIONS Determinate Thing = one that is particularly designated or physically segregated from all others of the same class. The opposite is the generic thing. Why is there a need to determine whether the prestation is determinate or

generic? A generic thing can be replaced while a determinate thing cannot. If the latter is lost due to a fortuitous event, the obligation is generally extinguished while if the former is lost due to the same circumstance, the obligation subsists for the obligor can look for the same item elsewhere. Duties/Obligations of the Obligor If Generic: 1. To deliver the thing of the same class but of neither inferior nor superior quality. 2. If the thing is lost due to fortuitous event or due to his (the obligor) own fault, to look for another item of the same class elsewhere and deliver the same to the creditor. If Determinate: 1. To take care of the thing with the diligence of a good father of a family. However, if there’s a higher standard of care expressly stated by the provisions of law or expressly stipulated by the contract, that higher standard of care should be followed. 2. To deliver the thing. 3. To deliver the fruits of the thing from the moment the obligation to deliver arises. Fruits are those that the thing has given existence to. Normally, the delivery of these is included as obligation from the moment the obligation to deliver the prestation arises. When does the moment the obligation to deliver arise? It depends upon the kind of obligation: In obligations without a condition or a period, this moment arises at the perfection of the contract. (PURE obligation) In obligations with a period, this moment arises on the date of due. In obligations with a suspensive condition, this moment arises at the moment the condition occurs. In obligations with a resolutory condition, this moment arises at the perfection of the contract. 4. To deliver the accessions and accessories even if they have not been mentioned. Accessions – these are improvements of the thing. Accessories – those joined to or included with the principal for the latter’s completion, better use, perfection or enjoyment. Rights of the Creditor If the Prestation is a Generic Thing: 1. He may ask for performance of the obligation. 2. He may possess anything within the same class at the expense of the debtor. 3. He may demand damages.

If the Prestation is a Determinate Thing: 1. He may compel the debtor to deliver the thing. Nobody else is in possession of the same thing in this entire world. 2. He may demand damages. If the Prestation is a Service/Act: In all cases, the debtor cannot be compelled to do the act for this would violate his right against involuntary servitude. However, the creditor can still have the following remedies depending on the following cases: a. If the debtor fails to perform or if he did perform but in contravention of the tenor 1. The creditor may perform the act or may ask somebody else to perform the act at the expense of the debtor. 2. The creditor may demand damages. b. If the debtor performs the obligation poorly – 1. The creditor may have the same be undone at the expense of the debtor. 2. The creditor may demand damages. If the Prestation is a Service/Act that is Forbidden: 1. The creditor may demand the debtor what has been done be undone at the expense of the debtor. 2. The creditor may demand damages. Speaking of Damages, what is it? Damages refers to the harm done and the compensation that can be received by the offended party as a result of such harm. What are the grounds for liability to pay Damages? These are Fraud, Negligence, Delay, and Contravention of the tenor of the obligation. Fraud is the voluntary execution of a wrongful act, or a willful omission, knowing and intending the effects which will arise from such act or omission. Kinds of Fraud a. According to meaning 1. Fraud in obtaining consent – this kind of fraud has an effect on the validity of the contract as this occurs before and during the formulation of contract. The remedies available to the offended party would depend if the fraud is causal or incidental. a. Causal Fraud or Dolo Causante – fraud done that without it, consent would’ve not been given. This renders the contract voidable. b. Incidental Fraud or Dolo Incidente – fraud done that without it, the creditor would’ve agreed in different terms. The contract remains valid but the party offended is entitled to damages. 2. Fraud in the performance of the obligation – the deliberate or intentional evasion by the debtor of the fulfillment of his obligation in a normal manner. This type of fraud does not affect the validity of the contract. b. According to time of commission

1. Future Fraud. If the two parties agreed to waive an action on future fraud, such waiver is considered void because permitting such advance renunciations would practically leave the obligation without effect. Thus, the debtor will still be liable for damages if he commits fraud in the performance of his obligation despite the waiver. 2. Past Fraud. If the two parties agreed to waive an action on past fraud, such waiver may be considered valid. This can be validly renounced because it is deemed an act of generosity of the creditor. What is renounced is the effect of fraud, particularly the right to indemnity. This is an act of liberality on the part of the creditor. Negligence (Culpa) – this is the omission of the diligence required by the nature of the obligation (as stated by law or stipulated in the contract) and corresponds with the circumstances of the person, time, and of the place. If neither the law nor the contract state the standard of care that is needed while the thing is in the hands of the debtor, the debtor must observe the diligence of a good father of a family. Kinds of Negligence 1. Culpa Contractual (contractual negligence) – this is the omission of the diligence required by the contract. 2. Culpa Aquiliana (civil negligence/tort/quasi-delict/culpa extra-contractual) – these are omissions that cause injury to another, there being no existing contractual relationship between the parties. 3. Culpa Criminal (criminal negligence) – this is an omission that is punishable by law. This is a crime known as Reckless Imprudence. Distinction between Fraud and Negligence – the element of intention to cause damage is present in Fraud but is absent in Negligence. Delay – this is the non-fulfillment of the obligation beyond the due date. Kinds of Delay 1. Mora Solvendi – delay on the part of the debtor (delay in fulfilling the obligation) 2. Mora Accipiendi – delay on the part of the creditor. This happens when on the due date, the creditor refuses to accept the prestation due without any justifiable reason. 3. Compensation Morae – delay in reciprocal obligations; i.e., both parties are in default. Here, it is as if there is no delay. Requisites of Delay 1. Due date has arrived. 2. The creditor has already demanded performance of the obligation. 3. The debtor does not perform the obligation even after the creditor has already demanded. Without creditor’s demand, there’s no delay. However, there are instances when demand is no longer necessary for the delay to exist. These are the following: 1. When the law so provides. 2. When the obligation expressly so declares (depends upon the agreement of both parties).

3. When time is of the essence. 4. When out of the fault of the debtor, the demand has become useless (such as when the prestation is lost). 5. In reciprocal obligations where the obligations arise from the same cause and the date of due is the same between parties, once one of the parties fulfills his obligation, the other party automatically incurs delay without the need for demand. In an obligation not to do, there is never a delay for one cannot be in delay for not doing something. Effects of Delay 1. The offending party shall be liable for damages. 2. If the prestation is a determinate thing and a fortuitous event caused the debtor to lose the thing, he shall be liable for the amount of the thing. What happens to the obligation if a fortuitous event takes place and causes the loss of the prestation? As stated earlier, the answer would depend on whether the prestation is a determinate thing or a generic thing. If generic, the obligation subsists. If determinate, the obligation is generally extinguished except in the following cases: 1. When the law expressly provides. Example: under Art. 1165 of the Civil Code, the debtor would still be liable if he has incurred a delay or has promised himself to deliver the thing to two persons of different interests. 2. When the parties have agreed to declare liability even in case of fortuitous event. 3. When the nature of obligation requires the assumption of risk. Example: the liability of an insurer in case of a loss. Unlike any other obligation, the liability of an insurer is exactly the opposite: it arises after a fortuitous event occurs. Remedies Available to Creditors to Enforce the Obligation In the event of breach of obligation, the creditor has the following remedies: 1. Pursue the debtor’s properties except those exempt by law. This is usually done through attaching the properties. If the court has decided in favor of the creditor, the court may order that the properties belonging to the debtor be sold and the proceeds thereof be applied as payment of his obligation. 2. Exercise the rights belonging to the debtor except those personally belonging to him (accion subrogatoria). In case the debtor has his own debtor in another obligation, the creditor may file a court action directing the debtor’s debtor to pay the creditor. In effect, the creditor is exercising the right to collect from the debtor’s debtor which is a right that belongs to the debtor. 3. Impugn the acts made by the debtor that may have been done to defraud his creditors (accion pauliana). In cases where the determinate thing is sold by the debtor towards another person, the creditor may ask the court to rescind the sale made by the debtor. DIFFERENT KINDS OF OBLIGATIONS 1. 2. 3. 4.

According to Time – pure, conditional and obligations with a period According to Prestation – simple, conjunctive, alternative and facultative Obligations with 2 or more passive/active subjects – joint and solidary According to divisibility – divisible and indivisible

5. Obligations with penal clause According to Time 1. Pure Obligations – these are obligations without a condition or a period. Once the contract is perfected or when the court has ordered the payment of liability in obligations arising from law, the obligation is demandable at once. 2. Conditional Obligations – these are obligations whose demandability or extinguishment depends upon the happening of a condition. The probability that the condition will happen is never a hundred percent. What is a condition? It is an uncertain event that wields an influence on a legal relationship (Manresa). It is that event that causes the demandability or extinguishment of the obligation. However, it is uncertain. Hence, no one knows when it will and whether it will happen. Kinds of Condition As to the demandability or extinguishment of the Obligation a. Suspensive – the happening of which gives rise to the obligation. b. Resolutory – the happening of which extinguishes the obligation. At the perfection of the contract, the obligation is demandable at once but it shall be extinguished upon the happening of the condition. As to the will of a person a. Potestative – the happening of which depends upon the will of any of the parties. i. Potestative on the part of the debtor 1. If suspensive – the obligation is void for this rests upon the will of the debtor. The law considers this as a void obligation because of the lack of seriousness in the part of the debtor. Even if the condition is fulfilled, the obligation is not demandable. 2. If resolutory – the obligation is valid. ii. Potestative on the part of the creditor – this is valid whether resolutory or suspensive. b. Casual – the happening of which depends upon the will of a third party or upon chance. c. Mixed – combination of Potestative and Casual Query “I will give you my car if I can sell my land.” Suppose I am able to sell my land, am I bound to give you my car? Answer: It appears that the obligation is Potestative on the part of the debtor (and therefore, void). However, this is not entirely Potestative. This is a mixed obligation for the condition does not only depend upon the will of the debtor, but also upon the availability and the willingness of the buyer (of the land). 3. Obligations with a Period – these are obligations whose demandability or extinguishment depends upon the arrival of an event or the date set. What sets these obligations apart from conditional obligations is the fact that the probability that the event will happen is always a hundred percent. In other words, there is a day certain when the obligation will arise or cease.

Period – is a space of time which determines the effectivity or extinguishment of an obligation. Day Certain – is that day that must necessarily come although it may not be known when. Kinds of Period 1. Ex Die – period with a suspensive effect. Here, the obligation is demandable after a lapse of a period. 2. In Diem – period with a resolutory effect. Here, the obligation is demandable at once but will be extinguished after a lapse of a period. Query “I will pay you my debt when my means permit me to do so.” Is this an obligation with a period or with a condition? Answer: Although it may seem that this obligation appear as one with a condition that depends upon the will of the debtor (and therefore apparently VOID according to the Civil Code), the fact remains that payment does not depend on the debtor’s will, for indeed he has promised payment. What depends really on him is not payment, but the TIME when payment is to be made. Hence, the law under Article 1180 deems this obligation as one with a TERM or PERIOD. The remedy available to the creditor is to ask the court to fix the term. Who has the benefit of the period? Whenever a period is designated in the obligation, it shall be presumed that it is for the benefit of both parties, unless from the tenor or other circumstances, it should appear that it has been established for the benefit of only one of the parties. If only one of the parties has the benefit of the period, the debtor cannot be compelled to perform the obligation or the creditor cannot be compelled to accept performance before the term expires. Examples 1. For the benefit of the debtor: Kent is obliged to give Karen 10 boxes of chocolates on or before February 29, 2012. Kent may have the option to pay anytime before February 29, 2012 lapses but he cannot be compelled to pay before this date. 2. For the benefit of the creditor: Karen borrowed 10,000 pesos from Kent collectible on or before December 31, 2009. Kent may demand payment anytime before December 31, 2009 lapses but he cannot be compelled to accept payment before this date. If the debtor has the benefit of the period, he may lose it under some circumstances. If he loses it, the creditor has the right to demand immediate payment. Article 1198 enumerates the following circumstances: 1. When the debtor has become insolvent, unless he has given a guaranty or a security for the debt. 2. When he does not furnish guaranties or securities that he has promised.

3. When through his own faults, the guaranties or securities have been impaired, or through fortuitous events, these disappear, unless he furnishes new ones equally satisfactory. 4. When he violates any undertaking in consideration of which the creditor agreed to the period. 5. When he attempts to abscond. According to Prestations 1. Simple – there is only one prestation 2. Compound – there are several prestations a. Conjunctive – several prestations are due and all must be performed b. Distributive or Disjunctive – several prestations are due but the debtor can perform only one. This may either be alternative or facultative. Alternative Obligation – this is an obligation in which there are several prestations but a performance of any of them is sufficient to extinguish the obligation. Who has the right to choose the prestation? The right of choice belongs to the debtor, unless it has been expressly given to the creditor. However, there are certain limitations on the debtor’s right of choice: 1. If he has communicated his choice to the debtor, his only option is to deliver his choice. 2. He cannot choose those prestations which are impossible, unlawful or which could not have been the object of the obligation. Circumstances when the alternative obligation becomes a simple obligation: 1. When the debtor has communicated his choice to the creditor. 2. When after some events and circumstances, only one prestation is left practicable. 3. When the creditor has communicated his choice to the debtor, if he has been expressly given the right of choice. What happens if one or more of the prestations are lost? It depends upon the circumstance. 1. When right of choice belongs to the debtor – a. If some of the prestations are lost due to fortuitous event or through the debtor’s fault, the debtor may deliver any of the remaining prestations. b. If all of the prestations are lost, it depends upon whether it was the fault of the debtor or not. i. If debtor’s fault – the debtor shall pay the value of the last thing lost plus damages ii. If due to fortuitous event – the debtor’s obligation is extinguished 2. When right of choice belongs to the creditor – a. If some of the prestations are lost… i. If due to a fortuitous event, the debtor may deliver the prestation which the creditor has chosen or if only one remains, he may deliver the remaining. ii. If due to the debtor’s fault, the creditor may choose between the value of the prestation he likes (if it was lost) plus damages or any of the remaining prestations b. If all the prestations are lost…

i. ii.

If due to a fortuitous event, the obligation is extinguished. If due to the debtor’s fault, the creditor may demand payment of the value of the prestation he likes plus damages.

Facultative Obligation – this is an obligation where there is one principal prestation but the debtor has the option to deliver another as an alternative. What if the principal prestation is lost? The answer would depend on whether the debtor has already communicated the substitution or not. If substitution has not yet occurred – a. Due to fortuitous event – the obligation is extinguished b. Due to debtor’s fault – debtor shall be liable for damages. If substitution has already occurred – whether it is due to a fortuitous event or due to debtor’s fault, there is no effect for there is no more obligation to deliver the principal thing. After the substitution has occurred, the thing due now is the substitute and not the principal. What if the substitute is lost? The answer would also depend on whether the debtor has already communicated the substitution or not. However, the same would be completely the opposite of the above. 1. If substitution has not yet occurred – whether it is due to a fortuitous event or due to the debtor’s fault, there is no effect for there is no obligation to deliver the substitute. The debtor may just deliver the principal thing. 2. If substitution has already occurred – Due to fortuitous event – the obligation is extinguished. Due to debtor’s fault – debtor shall be liable for damages. Joint and Solidary Obligations These are obligations with the concurrence of two or more debtors and creditors. Joint Obligations – these are obligations with debtors who shall each answer only for the proportionate part of the debt, and/or the creditors who shall each demand only the proportionate part of the credit. “To each his own.” Solidary Obligations – these are obligations with debtors who shall each answer for the full amount of the debt, and/or the creditors who shall each demand for the full amount of the credit. “All for one, one for all.” Examples “We promise to pay Raymond Andes the sum of P30,000.” Signed by: Kent Cardino, Angel Openiano, and Karen Obligacion “I promise to pay Raymond Andes the sum of P30,000.” Signed by: Rey Redoblado, Yeng Monasterial, and Kathleen Endrano Unless otherwise stated, the obligation with 2 or more debtors and/or creditors shall be presumed to be Joint. However, there are instances when express statements are not necessary for the obligation to be considered Solidary:

1. When the law so requires – such as in obligations arising from torts, quasi-contracts and crimes. 2. When the nature of the obligation requires solidarity. Query Kent, Bok and Karen are solidarily liable to Barbz for 300,000 pesos subject to the following terms: the share of Kent is payable on the date of his marriage to Pokwang; the share of Bok is payable on the next blue moon; and Karen’s share is payable when Barbz passes the CPA board exam. When and to whom can Barbz demand payment assuming the following additional details? June 15, 2009 – Kent-Pokwang Nuptials September 29, 2009 – the date of the next blue moon October 19, 2009 – the day Barbz passes the board exams Answer: On June 15, Barbz can demand payment of Kent’s share from Kent, Bok or Karen. On September 29, Barbz can demand payment of Bok’s share from Kent, Bok or Karen. On October 19, Barbz can demand payment of Karen’s share from Kent, Bok or Karen. According to Divisibility Divisible Obligations – one capable of partial performance. Indivisible Obligations – one not capable of partial performance. Obligations with a Penal Clause – these are obligations which provide for a greater liability on the part of the debtor in case of non-compliance. The accessory undertaking on the part of the debtor is called a penal clause. Proof of actual damages suffered by the creditor is not required for the penalty be demanded. The penalty can take the place of damages and interest in case of non-compliance except in the following cases: 1. When there is a stipulation to that effect. 2. When the debtor has committed fraud. 3. When the debtor refuses to pay penalty. Can the debtor pay the penalty only instead of performing the principal? No, unless it is expressly reserved. The reason is that if he can pay penalty alone without the principal, the latter will be considered just a substitute, which actually violates the very nature of the obligation. Remember, this is not a facultative obligation. Can the creditor demand the fulfillment of both the obligation and the payment of the penalty? As a general rule, this is not allowed unless such right is clearly granted to him. It should be noted that to permit the debtor to pay the penalty as a substitute for performance, that right must be EXPRESSLY given to him. On the other hand, to allow the creditor to demand both the fulfillment of the obligation and the payment of the penalty, it is NOT necessary that this right be EXPRESSLY given him, it is sufficient that such right has been CLEARLY granted to him. The nullity of the principal obligation carries with it the nullity of the penal clause but the

nullity of the penal clause does not have any effect on the principal obligation. This is so because the principal obligation can stand by itself. EXTINGUISHMENT OF OBLIGATIONS According to Article 1231, obligations are extinguished by the following ways: 1. 2. 3. 4. 5. 6.

By By By By By By

payment or by performance; loss of the thing due; remission or condonation; merger or confusion; compensation; novation

Other reasons as provided by Soriano: 7. By 8. By 9. By 10. By

annulment of contract rescission of contract fulfillment of resolutory condition prescription

Payment or Performance – this is the fulfillment of the obligation. However, there are some certain rules to follow: 1. The debtor cannot compel the creditor to accept a prestation different from the one promised/agreed notwithstanding the quality of the prestation. 2. In obligations to deliver a generic thing, the obligor cannot deliver a thing of inferior quality neither can the obligee demand a thing of superior quality. 3. The payment or performance must be complete. The creditor cannot be compelled to accept partial performance. 4. If the obligation is in the form of money, payment should be in legal tender. What is a legal tender? Legal tender is the money or currency the debtor can compel the creditor to accept. Under Section 52 of RA 7653 (The New Central Bank Act), if the payment is made in the form of coins, this shall be acceptable as a legal tender in the following amounts: 1. For twenty-five centavo coins and above, legal tender is up to P 50.00. 2. For ten centavo coins and below, legal tender is up to P 20.00. All bills are legal tender up to any amount. What are the things the debtor needs to have in possession to make the payment valid? 1. He must have the free disposal of the thing due. It must be free of claims by or encumbrances in favor of third persons. 2. He must have the capacity to alienate the thing. The debtor must not be incapable of giving consent What happens if the incapacitated debtor makes payment? If the payment is made, the guardian of the incapacitated person or the incapacitated person, when he gains capacity, may seek the annulment of payment. This is subject to exceptions.

What happens if a Third Person makes payment? The creditor is not bound to accept payment except in the following cases: 1. There is stipulation to that effect 2. The third person has interest in the fulfillment of obligation such as a guarantor or a co-debtor. What are the rights of a Third person who makes payment? The rights of a third person vary based on the existence or non-existence of the consent of the debtor. 1. If the debtor has consented, the third person may recover what he has paid from the debtor. Plus, he is entitled to be subrogated in the rights of the creditor. 2. If without the debtor’s knowledge or against his consent, the third person may only recover what has benefited the debtor and he is not entitled to be subrogated in the rights of the creditor. To whom should the debtor offer his payment? 1. 2. 3. 4.

To the creditor To the creditor’s successors in interest, such as his assigns or heirs To any person authorized to receive payment In the case of garnishment, to the creditor’s creditor

Special Forms of Payment 1. 2. 3. 4.

Dation in payment / Dacion En Pago Cession Application of Payment Tender of payment and Consignation

Dacion En Pago – this is a special form of payment where the debtor asks the creditor to accept the ownership of a property in lieu of the original obligation. Article 1245 provides that this form of payment shall be governed by the law on sales. However, the modern concept of dacion en pago considers it as a novation by change of the object (Tolentino). Thus, the provisions on sales and novation both apply to dacion en pago. Cession – this is a special form of payment in which the creditors are authorized to sell all of the debtor’s properties and the proceeds thereof are applied to the credits of several creditors. Dacion En Pago In favor of only one creditor

Cession There are various creditors

Payment extinguishes the obligation to the extent of the value of the thing delivered unless the parties agree that the obligation be totally extinguished. Transfer of ownership of thing alienated to creditor

Extinguishes credits only up to the extent of proceeds from sale of assigned property, unless otherwise agreed upon.

Debtor is not necessarily in state of financial difficulty

Assignment presupposes insolvency of debtor

Only possession and administration with authorization to convert property to cash with which the debts shall be paid

Assignment of only some specific thing

Assignment involves all the properties of the debtor -taken from UP Law Bar-Ops Reviewer

Application of Payment – this is a special form of payment where the debtor applies his available funds in payment of several debts due to the same creditor. Who has the right to apply payment? As a rule, the debtor has the right to apply payment. But if the debtor does not designate his payment, the creditor may choose to which debt the payment must be applied. If both the debtor and the creditor have not made the designation, the following rules shall be applied: 1. The payment must be designated to the most onerous. Query: Which obligation is more burdensome? 1-year old debt Loan with 10% annual interest

3-year old debt Loan with 6% semi-annual interest

Debenture Bonds

Loan with chattel mortgage

Simple Obligation

Solidary Obligation

2. If all the debts are of the same burden, the payment must be applied proportionately. Tender of payment – is the act of the debtor of offering the creditor what is due to him. Consignation – is the remedy available to the debtor when after the tender of payment, the creditor refuses to accept or the creditor cannot accept it. This is the act of depositing the prestation in the hands of judicial authorities. Steps necessary for the tender of payment and consignation to properly extinguish the obligation: 1. There must be a valid tender of payment. 2. The creditor refuses to accept payment without justifiable reason. 3. Persons who are interested in the fulfillment of the obligation are given notice that there is intent to make consignation. 4. The sum or the thing due is deposited with the judicial authorities. 5. Persons who are interested in the fulfillment of the obligation must be given notice that the consignation has taken place. What happens when one or two of the steps above are not undertaken? 1. The obligation remains for the consignation is not effective. 2. The debtor will be considered in default. However, these are the instances when, even without tender of payment, consignation will still take effect: 1. When the creditor is absent or unknown or does not appear at the place of payment. 2. When there are 2 or more persons who claim the same obligation.

3. When the creditor is incapacitated. 4. When the title of the obligation is lost. 5. When without cause, the creditor refuses to give a receipt. The obligation is extinguished at the point when the creditor has accepted the thing due or when the judge has declared that consignation has been properly made. Can the debtor withdraw the sum or thing due while consignation is taking place? Yes, but the effects would be different depending on the time that it is made. If BEFORE the creditor has accepted the consignation OR the judge has declared that the consignation has been made, withdrawal produces the following effects: 1. The obligation continues to exist. 2. The guarantors, sureties and co-debtors are not released. If AFTER the creditor has accepted the consignation OR the judge has declared that the consignation has been made, withdrawal produces the following effects: 1. The obligation is revived. 2. The creditor loses his preference over the thing. 3. The guarantors, sureties and co-debtors are released. Note: This only happens when the creditor consents to the debtor’s withdrawal. The third persons are released because otherwise, they will be prejudiced by the revival of the obligation. Loss of the Thing Due A thing is deemed lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or cannot be recovered. Loss includes physical or legal impossibility of the service in which the obligation consists. As a rule, the obligation is usually extinguished when the loss of the determinate thing or service is due to fortuitous events. However, in the following cases, the obligation subsists even if the prestation is lost due to fortuitous event: • • • • •

When debtor has incurred in delay. When the law so provides. When the parties stipulated. When the nature of obligation requires the assumption of risk. When the debt proceeds from a criminal offense unless the person who should receive it refuses to accept without justifiable reason.

Loss of a generic thing or service or loss due to debtor’s fault does not extinguish the obligation. Condonation or Remission Condonation or Remission is the gratuitous abandonment of the creditor of his right to demand performance of the obligation. This refers to the forgiveness of the indebtedness. As a rule, the debtor’s consent is required for the extinguishment of the obligation to happen. Condonation is treated by law as a donation. Therefore, it must comply with the formalities of a donation to be valid:

1. When the remission involves a real property, remission and acceptance should be in the form of a public instrument to be valid. 2. When the remission involves a movable/personal property – a. If the property’s value exceeds 5,000 pesos, remission and acceptance should be in writing, whether in public or in private, to be valid. b. If the property’s value does not exceed 5,000 pesos, remission and acceptance can take any form. Confusion or Merger Confusion or Merger is the meeting in one person the characters of both the debtor and the creditor. Example: Kent makes a promissory note payable to Karen or order. Karen indorses the note to Sarj, Sarj to Neri, Neri to Rey, and back to Kent. The obligation is now extinguished as Kent is now the creditor of himself. What happens to Guarantors in Confusion? 1. If the principal debtor takes the place of both the debtor and the creditor, the guarantor is benefited. Both the principal obligation and the guaranty are extinguished. 2. If the guarantor takes the place of the creditor, the obligation subsists but the guaranty is extinguished. What happens if Merger takes place in a Joint Obligation? Only the share of the joint debtor or the joint creditor, where both the characters of the creditor and debtor meet, will be extinguished. What happens if Merger takes place in a Solidary Obligation? The whole obligation is extinguished. However, the solidary debtor, where both the characters of the debtor and the creditor meet, is entitled to demand the shares of his co-debtors. In the case of a solidary creditor, he shall be liable to the shares of his co-creditors. Compensation Compensation happens when two parties become debtor and creditor of each other. Kinds of Compensation 1. As to amount or extent a. Total – the obligations are of the same amounts b. Partial – the obligations are of different amounts 2. As to origin a. Legal – takes place by operation of law even though the debts are payable at different places and the parties are not aware of the compensation. 1. That each of the parties is principal debtor and principal creditor of each other. 2. That both debts consist in a sum of money or if they are things, they must be of the same kind, and also of the same quality if the latter has been stated. 3. That the two debts be due.

4. That both debts be liquidated and demandable. 5. That both of them have the free disposal of the things due. b. Voluntary or Conventional – takes place by agreement of the parties. c. Judicial – as ordered by the court. d. Facultative – compensation that may be claimed by one of the parties but not by both. The following are instances of a facultative compensation: 1. When one of the debts arises from a deposit. A deposit is a contract where a person receives a thing from another for safe keeping and of returning the same after the other party has demanded its return. The depositor may claim compensation but the depositary cannot. 2. When one of the debts arises from commodatum. A commodatum is a contract whereby a person is given the right to use the property of another but not the ownership. The lender may claim compensation but the borrower cannot. 3. When one of the debts arises from a claim of support for gratuitous title. The support referred to here is the future support. The one entitled to receive support can set up compensation but the one obliged to give cannot. 4. When one of the debts arises from civil liability of a criminal offense. The offended party can claim compensation but not the offending party. What if the debts are payable at different places? Legal compensation takes place but there shall be indemnity for the differences of travel expenses between the two parties. What if the credit has been assigned? Can the debtor claim compensation against the assignee? 1. If with his consent – he cannot claim compensation unless he has reserved his right. 2. If he was notified but he did not give consent – he can claim compensation but only those obligations due before the assignment. 3. If he was not notified – he can claim compensation of all debts maturing before he has obtained knowledge of the assignment. Novation Novation happens when there is a modification in the elements of the obligation. The original obligation, therefore, is extinguished and replaced by the new obligation. However, for the Novation to take effect there must be a valid pre-existing obligation. If the obligation is void, the Novation is also void. Kinds of Novation There is a novation wherein there is a change in the prestation or the condition (real or objective novations). Novations may be express or implied, total or partial. But the most important kinds of obligations are the ones wherein the debtors and creditors are modified. These are called Personal Novations. Kinds of Personal Novations 1. Substitution of the person of the debtor a. Expromision – substitution of the debtor happens without the knowledge or against the

will of the debtor. b. Delegacion – substitution is initiated by the debtor. Query

Expromision

Delegacion

What are the rights of the new debtor as against the old debtor?

The new debtor can only recover the amount that has been beneficial to the old debtor. He is not entitled to subrogation.

The new debtor can recover the amount he has paid and is entitled to subrogation.

What if the new debtor is insolvent?

The creditor cannot demand performance from the old debtor as he is already released by the novation.

The creditor can demand performance from the old debtor in the following cases: 1. The insolvency already exists at the time of novation and is known to the debtor; or 2. The insolvency already exists at the time of novation and is known to the public.

2. Subrogation of the rights of the creditor to a third person. Is Novation valid or void in the following cases? Case

Answer

New obligation is void

Void

Old obligation is void

Void

Old obligation is voidable and has not been annulled Old obligation is voidable but has been annulled The prestation of the old obligation has been lost due to fortuitous event The prestation of the old obligation has been lost due to debtor’s fault

Valid Void Void Valid